TRADING ETFS

TRADING ETFS

iShares ETFs provide access to a wide range of asset classes and markets, making them useful building blocks within investment portfolios. Just like individual shares, they can be bought and sold on exchange. Therefore, just like any investment, it is good to be familiar with when and how to best place an order.

GUIDE TO BUYING AND SELLING ETFS

Timing matters
Timing matters
Consider avoiding trading near the market open or close (including auctions), and for Asian exposures, remember to look at the underlying market(s) opening hours.
Seek price protection
Seek price protection
Especially during times of volatility: consider a limit order, which gives you more control over price and ensures your execution is at a price you are comfortable with.

BEST PRACTICES WHEN TRADING ETFS

Time:

  • ETFs can be purchased and sold anytime during exchange trading hours.
  • Markets can be more volatile near open and close. Consider trading after the first, and before the last, 15 minutes of the day. There is also less market making activity during open and close, which can result in wider spreads.
  • Consider the underlying exposure. For ETFs with exposure to Asian markets, which can overlap with the Australian trading day, if possible, consider trading when the underlying exchanges are open, as the value of the ETF will be easier to calculate and the bid/offer spread tighter.

Order Type:

Just like trading individual stocks, make sure that your order type is consistent with your goals:

1. Limit order

The order is executed only at the price specified, or better. This avoids an unexpected outcome at times of higher market volatility or potential wider spreads.

2. Market order

The order executes as soon as possible at the best price available at the time. However, all or part of the trade is at risk of being traded at a value different from the last trades price especially in times of market volatility or lower liquidity.

Due to the execution price risk, limit orders are generally considered to be best practice in most circumstances.

ETF LIQUIDITY

Liquidity is always an important consideration when selecting any investment. The more liquid an investment, the easier and more cost effective it will be to trade. On the other hand, poor liquidity can translate into difficulties in entering and exiting positions, as well as higher trading costs.

ETFs can be bought and sold during the trading day. When evaluating ETF liquidity, it is important to remember that ETFs differ from ordinary shares in one distinct way – ETFs are open-ended investment vehicles. This means that, like managed funds, the number of shares can actually increase and reduce depending on investor demand.

Although ETFs trade like shares, the liquidity of an ETF works very differently to the liquidity of a share. With an ordinary share, trading reflects the buyers and sellers interacting on an exchange at a price the represents the economic value of a company and natural investor supply and demand. The trading of the ETF also depends on the natural investor supply and demand of the product on the exchange, but this only partially accounts for the liquidity of an ETF (on-screen liquidity). There are in fact multiple layers that make up the entire liquidity of an ETF:

ETF Liquidity
Video

The ETF creation & redemption process

Understand ETF liquidity and the creation and redemption process that lets ETFs trade even when volume is low.

If you’re familiar with exchanged traded funds, or ETFs, you may have heard the phrase Creation and Redemption. But let’s dig deeper into what it means and why it’s important?

ETFs are low cost and tax efficient ways to access both broad and precise market exposures.

They trade like stocks, can provide deep liquidity, and their prices are closely tied to the value of their underlying securities.

But how is this possible?

It’s all thanks to the processes of creation and redemption.

To better understand how it works, think of an individual stock or bond as a flower.

Just like companies come in different sectors and sizes, flowers come in all kinds of varieties and shapes.

Now take a variety of flowers and bundle them into a bouquet, and you’ve got yourself an ETF.

The price of an ETF is based on the price of the stocks or bonds that make up the ETF.

So when the prices of individual flowers increase, so does the price of the bouquet.

Now let’s say an investor wants to buy a bouquet, what does she do?

She goes to a flower shop, which we can imagine as a brokerage firm.

Here, the investor browses bouquets and finds the emerging markets bouquet, the clean energy bouquet, and the S&P 500 bouquet.

She decides to buy one S&P 500 bouquet.

Like a florist, the broker dealer takes this order and sends the market maker out to the market to fill it.

The market maker finds the S&P 500 bouquet, and brings it back to the shop.

The investor pays the broker and gets the ETF she wants. Easy!

But what happens if the investor wants one hundred bouquets?

Just as before, the broker dealer sends the market maker to get one hundred bouquets. But there are only five bouquets available.

So what’s the poor market maker to do?

Thanks to the unique process of ETF creation, more bouquets can be made to fill the large order.

The creation process kicks in as soon as the investor places the order.

It begins with the authorized participant, or AP for short. The AP watches the market in order to manage the supply of flowers and bouquets.

When the market maker can’t fill an order, he asks the AP to make extra bouquets.

The AP checks the S&P 500 Index to find out exactly which individual flowers make up the S&P 500 bouquet.

Once the AP has everything he needs, he gives the flowers to iShares.

Similar to a bouquet designer, iShares assembles brand-new S&P 500 bouquets.

Once they bundle the individual flowers, iShares gives the new bouquets back to the AP;

the AP gives the bouquets to the market maker;

and the market maker brings them back to the broker dealer,

who in turn sells them to the investor at market price.

Despite the size of the order, the price of the bouquets stays approximately the same due to the increased supply.

Now let’s flip things around for redemption.

The investor wants to return one hundred bouquets, so the florist buys them back.

He then gets the market maker to take the bouquets to the market to see who wants them.

But there’s already an adequate supply of bouquets. So what does the market maker do now?

Well, he turns to the AP again.

The market maker gives the AP the bouquets, who then brings them to the iShares workshop where they are disassembled into individual flowers.

And just like that, the number of bouquets decreases to meet market needs and keep bouquet prices stable.

Creation and redemption occur to keep ETF supply in line with demand.

This generally keeps ETF values closely tied to their underlying assets.

And it allows you to easily trade ETFs throughout the day due to their deep liquidity.

Visit iShares to learn more about ETFs today.

REFERENCE THE ESTIMATED ETF VALUE THROUGHOUT THE TRADING DAY

An estimated ETF price is published during the trading day for iShares Australian fixed income (IAF, IGB, ILB) and Australian Equity (IOZ, ILC, ISO).

This estimated price provides a reference point for the current fund value and can be viewed on the ETF product page.

CONFIDENCE IN THE MARKET FORCES

Market makers regularly provide two-sided (buy and sell) quotes to clients on the exchange.

With transparent ETFs, the ability to exchange the ETFs for either cash or the underlying assets provides economic incentives for market makers to trade when the price deviates from the value of the underlying assets. This self-policing mechanism ensures the exchange price does not materially deviate from the values of the fund’s assets. Any drifting in the price of an ETF away from the current value of the ETF’s portfolio of securities will economically incentivise market makers due to the fact that profit can be made by selling the higher-priced asset while simultaneously buying the lower-priced asset. We term this the “ETF arbitrage mechanism”.

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iShares ETFs are available on the following online trading platforms. Please click a logo to visit their website.

nabtrade BellDirect IG Trading Platform
CommSec Sharesies

A broker is a professional who buys and sells securities such as ETFs on a stock exchange on behalf of clients. You can buy iShares ETFs through a broker during daily trading hours. Please note that brokerage and other fees may apply.

The ASX has a tool to help you locate a stockbroker which you can access here.

INVESTMENT PLATFORMS

ETFs can be bought and sold via investment platforms. The trade is executed on a stock exchange by the platform provider.

For more information on the ETF coverage and process by your investment platform please contact your relation manager

STILL HAVE QUESTIONS ABOUT TRADING ISHARES ETFS?

Our Dedicated ETF Global Markets Team is available to provide trading support and answer your queries.

Number: +61 (0)2 9272 2345

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